Best of Times & Worst of Times

Employment Issues Continue, Wealthy Households Prosper

Bloomberg reported yesterday that Standard & Poor’s 500 Index companies will earn 18 percent more this year than in 2010 according to the average estimate of more than 9,000 analysts. Even assuming the companies posted no growth, the price-earnings ratios would be lower than 96% of the time during the last two decades. The point was that from a valuation standpoint stocks remain attractive.

Meanwhile the Globe & Mail asked the question as to why the ‘job crisis’ is not at the center of the political and economic debate in the U.S. in light of the fact that nearly 14 million Americans – 9.1 per cent of the working population – are unemployed. Another 8.5 million Americans would like to work full time, but can only find part-time jobs. A further 2.2 million have been so discouraged by the grim labor market that they have given up looking for jobs altogether.

The article notes that those still actively looking for work have been unemployed for an average of 39.7 weeks, a record. These numbers “depict an unemployment crisis that is deeper and more sustained than at any time since 1948, when U.S. records first started to be kept”. On the other hand, while “unemployment remains stuck above 9 per cent” since the March, 2009 low the Dow Jones Index has risen more than 85 per cent – leading to divergent economic end points for Wall Street and Main Street.

And according to a report released yesterday nearly 50 metropolitan regions — or more than one out of seven — are unlikely to bring back the jobs lost in the recession until after 2020. Among those areas are Cleveland and Dayton, Ohio; Detroit; Reno, Nev.; and Atlantic City, according to the report commissioned by the United States Conference of Mayors.

Recent developments in the economy and markets mean that this is the worst of times—and best of times—for U.S. households. The investment implications of this split should be positive for the markets, as we discuss below.

The Best of Times & The Worst of Times

Explaining the excellent financial results of high-end retailers Neiman Marcus, Tiffany and Giorgio Armani, a number of surveys released last month indicated the number of wealthy households in the U.S. has rapidly increased. The Federal Reserve Board, whose numbers most wealth institutes depend on as a starting point for defining the rich, classifies the well-heeled in three groups.

The wealthiest 10 percent of Americans have a net worth of $800,000, the central bank says. The richest 5 percent of Americans have a net worth of $1.5 million. And the top 1 percent have a net worth of $6 million or more.

Spectrum Group

The Spectrum Group reported the number of U.S households with a net worth of $1 million or more, not including primary residence, grew 8% to 8.4 million in 2010. It was 7.8 million the year before. Census Bureau estimates indicate there are around 115 million households in the U.S.

While the gain in wealthy households was impressive, the number of millionaire households was well below levels seen in 2006 and 2007 – and about equal with the number five years earlier in 2005 (see Spectrum Group chart).

The number of ‘Ultra High Net Worth’ households, those with a net worth of $5 million or more (not including the primary residence), advanced to 1.06 million from 980,000 in 2009. This number was an improvement but was below the levels seen in 2006 and 2007.

AARC study

The American Affluence Research Center (AARC), a research organization, reported that the number of American millionaire households stands at 9.7 million – a bit more than the Spectrum Group study. The AARC includes the primary residence in their wealth estimates. They found the number of wealthy households increased for the last two years, confirming the trend identified by Spectrum.

The AARC claims the ‘average’ wealthy household has an average net worth of $3.1 million, with equity in a primary residence of $1.2 million and investable assets of $1.8 million. Spectrum notes these individuals are usually married, and in their 50’s or 60’s.

Deloitte/Oxford study

The Deloitte Center for Financial Services collaborated with Oxford Economics on a recent survey of trends in wealth accumulation. Wealth in their study included financial assets (stocks, bonds, and other investments) and nonfinancial assets including primary residence, durables, business equity, and other assets.

Like the other studies they found that wealthy households peaked in the U.S. in 2006 – but the number with a net worth of over $1 million has slowly increased over the last couple of years.

Deloitte’s study estimated that in the U.S. around 10.5 million households had a net worth of more than $1 million. The vast majority of these households (74%) had a net worth of between $1 million and $5 million.

According to their analysis millionaire households in the U.S. have an average net worth of $3.7 million.

Boston Consulting Group

The global number of millionaires expanded by 12 percent in 2010, led by Singapore, as gains in financial markets lifted global wealth for a second straight year according to the Boston Consulting Group.

Millionaire households are defined as those with investable assets of more than $1 million, excluding real estate and property such as art. Wealth became more concentrated, with millionaire households controlling 39 percent of the world’s assets, up from 37 percent a year earlier, the study said.

The number of millionaire households globally increased to about 12.5 million. The U.S. had the most $1 million-plus households, with 5.2 million, followed by Japan and China. The increase in wealth last year was mostly a result of strong performance by financial markets, the report said. The U.S. continued to have the highest proportion of wealth held in stocks, at 44 percent.

Worst of Times

In contrast to the best of times for wealthy households it has been the worst of times for a large portion of the population.

Food stamps

Food stamp participation rose for the 37th straight month last month. Individual participation in the Supplemental Nutrition Assistance Program, formerly known as the Food Stamp Program, rose in March to about 44 million, a number which has risen by 70% from March 2007.

Just under 14.5% of the American public received food stamp benefits compared to 8.7% five years earlier. Benefits averaged $133.24 per person.

The government spent $5.98 billion in March for the Food Stamp Program. Total costs for fiscal year 2011 are up to $35.22 billion. It cost taxpayers more than $68 billion last year, double the amount in 2007.

Housing prices

The Detroit News reported last month that March home prices across the country hit their lowest levels since 2002 (chart courtesy Detroit News). Roughly 28% of owners with mortgages are ‘under water’ – that is they owe more on their mortgage than the house is worth.

One analyst noted that the number of homeowners ‘effectively under water’ rises to around 50% if one takes into account realtor fees for selling a property and the need for a steep down payment to obtain financing on a new house.

Not only are housing prices slipping, but sales volume is very low compared to historical levels for both new and existing homes. The new home construction data indicates starts are at 30 year lows (chart courtesy Kelly Evans of the Wall Street Journal).

Since residential real estate is the largest asset held by most U.S. households the continued price weakness has not been beneficial for personal balance sheets. The real estate price weakness is in contrast with the robust gains seen in the equities market.

Unemployment and unemployment duration

The U.S. economy may be in for a long period of soft growth according to analysts. Employers hired the fewest number of workers in eight months in May and the unemployment rate rose to 9.1 percent.

The average unemployed person in America has been looking for work for 39.7 weeks, or more than nine months. That is the longest average unemployment spell since the Labor Department started keeping track in 1948. The longer a person is unemployed, the less likely they will re-enter the workforce.

The New York Times notes the long-term unemployed are disproportionately composed of older workers. These workers are more likely to have trouble finding re-employment if they are laid off. The Times concludes that “given how far behind these workers have already fallen, it may turn out that many of these Americans will never work again”.

Investment implications

Wealthy households who have a large share of their wealth invested in the stock market have been a major beneficiary of rising equity markets. But most U.S. households have encountered weak real estate markets and employment opportunities, with lackluster economic growth.

In this environment it will be difficult for the Federal Reserve to tighten monetary policy. We expect further monetary and fiscal proposals to promote growth and stabilize real estate prices. The historical data indicates these periods of accommodative policy have been periods when the stock market has tended to outperform.